TIP: If you get the dreaded audit letter from IRS

via WSJ - It's the taxpayer's nightmare: Duking it out with the tax man. The Internal Revenue Service has stepped up its attempts to rake in more overdue taxes, and it isn't being shy about auditing more people and clamping down more frequently with tactics such as levies and even asset seizures when it thinks someone needs to cough up more money. IRS officials have particularly zeroed in on individuals making $100,000 and above. Last year, more than 219,000 people with incomes in that group were hit with an audit, up about 32% from the previous year...

With the IRS intensifying its crackdown, growing numbers of Americans could soon be facing a tough decision: Whether to fight back, or simply cry uncle and cut a check. While the notion of fighting the IRS strikes dread into the hearts of citizens everywhere, the fact is that many people actually stand to benefit by doing battle with Goliath. There's an array of options, ranging from a simple appeals process to taking the tax man to court...

The first step in deciding whether to fight an IRS challenge is to do a quick cost-benefit analysis. Among the key factors: How much money is at stake, how good your records are, how confident you are of winning, how complex the issue is -- and, if you need to hire a tax expert, how much that will cost... One piece of advice: Never sign a joint return if you suspect your spouse is breaking the law. Instead, consider filing separately. Because once you sign a return, you're generally on the hook if something goes wrong later, unless you can show you were an "innocent spouse" -- which can include proving that you didn't know, and had no reason to know, about any tax shenanigans. These cases are tough to win.

Whatever the case, if you get an IRS letter challenging something on your return and asking for information, "the worst thing you can do is to ignore it" and hope the issue will disappear... Once you respond, if the agency won't budge or seems to ignore your point, consider asking to speak to the auditor's supervisor, Mr. Dougherty says. If that doesn't work, consider other paths, such as:

  • APPEALS: This is an IRS unit where issues may be resolved by correspondence, phone or in person. Taxpayers who want a face-to-face meeting can get one, the IRS says... The IRS appeals office receives about 100,000 cases a year, and roughly 80% are resolved, says Bruce Friedland, an IRS spokesman.
  • IRS TAXPAYER ADVOCATE SERVICE: This is a good place to consider going if you've already tried regular IRS channels and feel that you are stuck in the bureaucracy... Even though it may seem counterintuitive to seek relief from the IRS itself, the "TAS" unit has drawn widespread praise from tax professionals for its independence and willingness to help taxpayers. In the year ended Sept. 30, taxpayer-advocate offices around the nation received roughly 200,000 cases...
  • TAKING IT TO THE COURTS: Most people choose the U.S. Tax Court (www.ustaxcourt.gov3) since you don't have to pay the contested tax up front in order to have your case heard... Some people prefer going to federal district court or the U.S. Court of Federal Claims (www.uscfc.uscourts.gov4) because they think their chances are better there. But these courts generally will hear tax cases only after you've already paid the tax and filed a refund claim with the IRS... If you do go to court, remember that your case and, potentially, sensitive financial details become a matter of public record..

WHEN YOU CAN'T PAY: If you're facing major financial woes, you have a few choices. You can ask the IRS to let you pay on an installment plan. Or, if you're in such dire financial straits that you can't pay everything you owe, consider asking the agency to compromise...

Don't even think of challenging the IRS if you plan to argue that paying taxes somehow is voluntary, or that wages aren't really income. Courts have consistently rejected these and other arguments. Some people who tried have been hit with fines of as much as $25,000. As surprising as it may seem, there is a small but highly vocal number of people who have been trying it, the IRS says. In fact, so many people have tried things like this that the IRS has compiled a list of dumb arguments you shouldn't even bother with. To study up, go to the IRS Web site and type "frivolous" in the search box.

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